Performance Group Report on Selected Trade Companies

Introduction

Investing in any stock inherently involves some risks as well as potential rewards due to the
stock market's inherent dynamism. As part of our study in the FIN6001 course, this assignment
entailed the creation and analysis of a simulated stock portfolio over four weeks, commencing on
September 5, 2024, and concluding on October 3, 2024. The common objective of this
simulation was to enhance the knowledge of portfolio management, which involves evaluating
the risks and returns of investments. This paper explores important financial measures such as
stock returns, volatility, beta, and effective yearly returns in addition to modelling portfolio
performance. This is useful as it provides a better understanding of the dynamics and processes
involved in practical portfolio management.
Ten equally weighted equities from different sectors make up the portfolio, and each one
contributes to its total performance. This report offers a complete analysis of the portfolio.
Focused on the relationship between risk and return, the investigation includes not only the
results of individual securities but also the outcome of the whole portfolio. For this purpose,
stocks' performance will be evaluated, and some other quantitative measures will be computed so
that we can appreciate how that kind of ideal portfolio is created and maintained.
This report's performance evaluation focuses on the stock performance of ten leading companies,
risk assessment of the companies, and profit maximization approaches. The companies addressed
in the study include Amazon.com, Inc. (AMZN), Bank of America Corporation (BAC), BeiGene
Ltd (BGNE), Emerson Electric Co (EMR), Microsoft Corporation (MSFT), United Parcel
Service Inc (UPS), AT&T, Signet Jewelers Ltd (SIG) and Prologis Inc (PLD). Each company's
performance is evaluated with the help of new trade data regarding key strategies for the
business, performance indicators, risks, and profit strategies. More recent trade data is obtained,
and dispersion of volatility, the average three-day cumulative returns and changes in stock price
every day are highlighted while assessing the performance of the companies. The study has also
evaluated the potential threats that each of the companies faces, including internal and external
risks like competition in the market and government regulations, and has proposed strategies for
profit-making that are specific to the operational environment of the companies. The objectives
of the study were highly saturated with the aim of addressing the needs of the stakeholders and
investors and thus facilitating their decision-making capabilities with respect to the market
activities of the mentioned and well-represented companies and their shareholders.
1. Portfolio Selection
On September 5, 2024, a simulated investment of $100,000 was initiated with the goal of
constructing a well-diversified stock portfolio. The portfolio consisted of 10 equally capitalized
stocks from different industries, with each sector accounting for roughly $10,000. This allocation
ensured that the portfolio was manageable in all industries, providing a balanced approach to risk
management. The sectors and stocks chosen for the portfolio are as follows.
Electric Company: Emerson Electric Co. (EMR) - Selected for its consistent growth and
stability within the electric sector, providing essential infrastructure services.
 1. Gas/Energy Company: Chevron Corporation (CVX) - A major player in the energy
sector, Chevron was chosen for its exposure to both traditional and renewable energy
sources.
2. Real Estate Company: Prologis, Inc. (PLD) - Prologis, a leading industrial real estate
company, offers exposure to the growing logistics and e-commerce sectors.
3. Retail Company: Signet Jewelers Limited (SIG) - As a prominent retailer in the
jewellery industry, Signet was included to capture the retail sector's performance during
the selected period.
4. Transport Company: United Parcel Service, Inc. (UPS) - UPS was selected for its
global reach and pivotal role in the transportation and logistics industry.
5. Computer Company: Microsoft Corporation (MSFT) - Microsoft, a technology giant,
was chosen for its innovation and consistent growth in the computer and software
industry.
6. Biotech Company: BeiGene, Ltd. (BGNE) - BeiGene, a leader in biotechnology, was
included to capture growth in the health and biotech sectors.
7. Internet Company: Amazon.com, Inc. (AMZN) - Amazon, a dominant player in e-
commerce and cloud computing, was selected for its strong presence in the internet and
tech space.
8. Banking Institution: Bank of America Corporation (BAC) - Bank of America, one of
the largest financial institutions, was chosen to represent the banking sector.
9. Jewelry Company: Signet Jewelers Limited (SIG) - Given its presence in both retail
and jewellery, Signet offered dual exposure and was considered an important part of the
portfolio.

The criteria used to explain the choice of stocks included market capitalization, sector
development, and anticipated market stability or growth throughout the simulation. Using many
sectors within the portfolio ensured that sector-specific risks were tapered while offering options
for both stability and growth. By equally weighting the investments, we aimed to maintain a
balanced approach and reduce the impact of volatility from any single stock on the overall
portfolio performance.
2. Historical Daily Stock Prices And Returns
To evaluate the performance of the portfolio, we collected historical daily stock prices for the
selected companies. The selected period of interest consisted of the trading days from September
5, 2024 (the day before portfolios start) to October 3, 2024. Daily historical prices were sourced
from Yahoo Finance, and only “Adjusted Close” from Yahoo was used as these represent all
corporate actions, such as dividends and stock splits, and thus better portray the actual value of
the stock.
The steps to download the historical stock prices were as follows:

1. For each stock, we navigated to its page on Yahoo Finance and selected the “Historical
Data” tab.
 2. The date range was set from September 5, 2024, to October 3, 2024, and the frequency
was set to daily.
3. After downloading the data, we copied the “Adjusted Close” prices into an Excel
spreadsheet, ensuring that the prices for all stocks corresponded to the same trading dates.
4. For each stock, we computed the daily returns using the following formula:

Daily Return = [(Adjusted Close(t) - Adjusted Close(t-1)) / Adjusted Close(t-1)] * 100

These daily returns had to form the foundation for additional risk and return calculations. The
historical daily prices and returns were important for analysing the performance of the portfolio.
Primary returns of each stock were also determined in order to assess short-term volatility in
addition to assessing long-term performance trends to estimate the proportion of each stock in
the absolute returns of the ready-made portfolio.
3. Risk and Return of Individual Stocks and Portfolio
A key component of portfolio evaluation therefore lies in the determination of the risk/return
ratio. In this section, we also computed the mean daily returns and standard deviations (a
measure of variability) of each stock in the portfolio. These computations were also done for the
whole portfolio which included ten stocks invested with equal weight in those ten selected
stocks.
3.1 The Process of Determining Daily Returns and Volatility
In the case of every stock, the moving average of the daily returns for the 20 days was
determined by calculating the mean of daily returns. The return is a measure of the change in
price of the company from one business day to another business day. In the same way, the
standard deviation of the daily returns was used to measure the volatility of each stock. To
enhance the efficiency of the results, we also expressed the daily returns and standard deviations
in annual terms, which are widely used in the finance domain. The conversions were made using
the following formulas:
Annualized Mean Return = Mean Daily Return * 252
Annualized Standard Deviation = Daily Standard Deviation * √252
This provided a clearer picture of each stock’s performance over a longer horizon, helping to
compare the stocks’ risks and returns over a typical year.

3.2 Portfolio Risk and Return

Next, we calculated the risk and return for the entire portfolio. Since the portfolio was equally
weighted, the daily return was computed as the average of the daily returns for all ten stocks. The
portfolio's risk (volatility) was similarly computed as the standard deviation of the portfolio's
daily returns.

Portfolio Return (Daily) = Average of all stock daily returns

Portfolio Risk (Volatility) = Standard Deviation of portfolio daily returns

The mean and standard deviation of the portfolio’s returns were then converted into annualized
statistics, following the same process as for individual stocks. A key observation from this
analysis was that the portfolio’s overall volatility was lower than that of most individual stocks.
This is because diversification helps reduce unsystematic risk, meaning that the impact of any
single stock’s volatility is diminished when combined with others in the portfolio. However,
systematic risk, which is inherent in the market, remains.

3.3 Scatter Plot: Volatility vs. Return

To visualize the trade-off between risk and return, we created a scatter plot with annualized
standard deviation (volatility) on the x-axis and annualized mean return on the y-axis. This plot
included both the individual stocks and the overall portfolio.

The scatter plot provided several insights:

  Stocks with higher volatility generally exhibited higher returns, which aligns with the
common risk-return trade-off in finance.
 The portfolio, represented as a single point on the scatter plot, had moderate volatility and
returns, reflecting the benefits of diversification.
 Certain stocks, such as BeiGene, exhibited extreme volatility, while others, like Chevron,
demonstrated more stable performance.

4. Estimating Beta

Beta is a key measure of a stock's sensitivity to market movements. It quantifies the relationship
between a stock's returns and the returns of the broader market. A beta greater than one indicates
that the stock is more volatile than the market, while a beta less than 1 suggests that the stock is
less volatile. A beta of exactly 1 implies that the stock moves in line with the market.

4.1 Beta Estimation from Yahoo Finance

To estimate the beta for each stock, we first retrieved the beta values provided by Yahoo Finance.
These beta estimates are typically calculated using five years of monthly data. For each stock in
the portfolio, we recorded the beta as part of the stock’s firm summary. These values served as a
benchmark for the regression-based beta estimation performed later.

4.2 Beta Estimation Using Regression Analysis

For a more detailed analysis, we used Excel to run regression models that estimate beta based on
the historical returns of the stocks and the broader market, represented by the S&P 500 Index
(AGSPC). The regression model used was as follows:

𝑅𝑖 = α + β * 𝑅𝑚 + 𝜀
Where:
𝑅𝑖 = daily return of stock i
𝑅𝑚 = daily return of the S&P 500 index


 β = beta coefficient

𝜀 = error term
 α = intercept


The regression analysis followed these steps:

 1. Download the historical prices of the S&P 500 index for the same period as the stock
prices (September 5, 2024, to October 3, 2024).
2. Calculate the daily returns for the S&P 500 index.
3. Use Excel’s regression tool to regress each stock’s daily returns against the S&P 500’s
daily returns.
4. The beta coefficient from the regression represents the stock’s sensitivity to market
movements.

4.3 Portfolio Beta

After estimating the beta values for each stock, we computed the portfolio beta as a weighted
average of the individual stock betas. Since the portfolio was equally weighted, the portfolio beta
was calculated. The portfolio beta revealed the portfolio's overall sensitivity to market conditions. A beta
close to 1 showed that the portfolio performed similarly to the market, while a beta far from being equal
to one depicted a higher or lower performance excess compared to the market.
4.4 Analyzing the Beta Scores
The regression results showed varying beta values for the individual stocks, reflecting their
different levels of exposure to market risk. Certain equities, including Amazon and Microsoft,
had a beta greater than 1, thus exhibiting more risk and more volatility. Other equities, for
example, Chevron and Prologis, had a beta of less than 1, making them, in turn, less volatile to
market fluctuations. The calculated beta of the portfolio was approximately the average of betas
for each stock in the portfolio in terms of market risk taken. Considering the diversification
within the sectors, the portfolio beta was somewhat lower than 1, indicating that the overall
combined portfolio was not as highly volatile as the overall market.
5. Return vs Risk: The Risk-Return Trade-Off
The trade-off between risk and expected returns is one of the cornerstones of successful portfolio
management. In the previous sections, we computed several risk and return measures—volatility
(which is standard deviation), beta, mean returns, and others—for every stock in the Sample and
the Sample Portfolio. This section delves into the main findings of this analysis and how risk and
return tend to be interrelated.

5.1 Risk-Return Relationship for Individual Stocks

The analysis revealed that individual stocks displayed varying levels of risk (volatility) and
return. Stocks with higher volatility, such as Amazon and BeiGene, generally exhibited higher
returns, reflecting the classic risk-return trade-off. Investors in high-volatility stocks expect
higher returns to compensate for the increased risk. Conversely, more stable stocks, like Chevron
and Bank of America, demonstrated lower returns but also lower risk, making them more
attractive to risk-averse investors.

5.2 Portfolio Risk and Return

The portfolio, consisting of equally weighted stocks from different sectors, exhibited moderate
risk and returns. The diversification across sectors played a critical role in reducing overall
portfolio risk, as it mitigated the impact of extreme volatility from individual stocks. As a result,
the portfolio had lower volatility than the most volatile individual stocks, yet its returns remained
competitive.
This diversification demonstrates the fundamental principle that a well-balanced portfolio can
reduce unsystematic risk (stock-specific risk) while still capturing market returns. However, the
portfolio remains subject to systematic risk (market risk), as indicated by its beta, which was
slightly below 1.

5.3 Comparing Risk Measures: Volatility vs. Beta

Volatility and beta are two different measures of risk. While volatility measures the total risk of
an individual stock, beta specifically measures market risk—how much the stock’s returns are
expected to change in response to changes in the market. In our analysis:

 Stocks with high beta values, like Amazon and Microsoft, were more sensitive to market
movements and had higher expected returns.
 Stocks with lower betas, like Chevron and Prologis, were less sensitive to market
fluctuations, making them less risky in terms of market risk but still subject to their
volatility.

The portfolio beta was close to 1, indicating that it moved in line with the market. This shows
that while diversification reduces unsystematic risk, systematic risk remains and is captured by
beta.

5.4 Insights on the Trade-off

The key insight from the analysis is that investors must balance risk and return according to their
investment goals and risk tolerance. Higher returns are generally associated with higher risk, as
seen with volatile stocks like Amazon. On the other hand, a diversified portfolio helps reduce the
overall risk without sacrificing too much return. The equally weighted portfolio demonstrated
this principle effectively, balancing the risk and return trade-off by spreading exposure across
different sectors.

6. Rebalancing the Portfolio

If given the opportunity to rebalance the portfolio, several strategies could be employed to
improve performance based on the observations made during the four weeks.
6.1 Reducing Exposure to High-Volatility Stocks
There were several stocks like BeiGene that were highly erratic and did not offer proportional
returns. Reduction could mean reducing exposure to the volatile stocks so as to balance the risk
of the portfolio. This would help to reduce the risk level of the portfolio and also bring about
more stable returns.

6.2 Experiencing High Exposure to Good Quality Equities

Shares of companies such as Microsoft and Bank of America were shown to be more stable and
had reasonable returns in terms of the risk taken. More exposure to these kind of stocks can help
in changing the risk to return characteristics of the portfolio and get better and more predictable
returns with less risk.

6.3 Adjusting for Market Trends

Since the market environment is constantly changing, making corrections to the portfolio
depending on the current tendencies in certain sectors could also contribute to the increase in
performance. For example, more attention to energy or technology industries, which demonstrate
high growth rates, might be more valuable for the long term.

6.4 Maintaining Diversification

During portfolio rebalancing, /must/ /include/… It is also important to balancing sectorial divers
to minimize risks. Where one eliminates the exposure to a particular stock or segment, one
should be adding to another, and therefore maintain diversification of the portfolio..

Conclusion

The four-week simulation provided valuable insights into the process of constructing and
managing a stock portfolio. By investing $100,000 across 10 equally weighted stocks from
different sectors, the portfolio demonstrated how diversification can effectively reduce risk while
still capturing returns. The evaluation of risk and return utilizing some of the metrics such as
volatility, beta, and mean returns demystified the need to create a risk-return tradeoff. The data
proved that although there were highly volatile and high return stocks, the portfolio was riskier
as compared to investing in the individual stock. There was a clear tradeoff between risk and
returns. High risk stocks had the prospect for higher returns considering that the level of
uncertainty surrounding them was also high. By looking at beta, we were able to quantify the
market risk of the portfolio and establish how each stock tilted the portfolio towards or away
from the market.
If given the opportunity to rebalance the portfolio, reducing exposure to highly volatile stocks
and increasing allocations to stable performers could optimize the portfolio’s performance. This
clarifying exercise stressed further the need for regular review and rebalancing in relation to
investment objectives that may change with the market and stock movements. Generally, the
expectations were met and the performance was consistent with the company’s principles on risk
management and the barriers of diversified investments on unsystematic risk which provided
room for market returns.
Through the performance evaluation of these ten trade companies, several opportunities as well
as risks can be noted demonstrating great variation owing to the type of industry and market that
each operates within. Factors such as shifts in market trends, changes in regulation, and
competition from other firms are some of the factors that can affect the performance operation
and market share of stock for every company. For instance, while Microsoft and Amazon are
leading players in technology and e-commerce, they still have to face challenges of rapid change
and changeable tastes of the consumers. In a comparable fashion, the conventional mature
industries of banking and energy represented by Bank of America and Chevron are also plagued
by maelstroms of economic volatility and regulatory environments which also spur or hinder
profit making. Furthermore, even overestimate a company’s future potential, this does not freeze
UPS from reengineering itself the changing nature of supply chain. Conversely, biotechnology
companies’ business operations such as maintaining BeiGene, have critical and systematic
operational risks stemming from the actual process of research and development activities.
Nevertheless, they can not only mitigate risks but also capitalize on growth opportunities by
implementing strategic measures such as continuous innovation, rigorous cost management, and
diversification of product lines. For instance, firms with sustainability strategies and
digitalization strategy firms are generally more competitive and serve a larger market. At the
same time, companies will require good risk management practices to minimize on the various
risks that are associated with the market. These particular companies stand the chance of creating
more sustainable business models by way of understanding as well as managing potential risks
that emanate from assets, emerging technologies, changes in the macro-economy or policies.
This analysis gives great importance to the fact of evaluating opportunities and threats that are
associated with investing. It Is just basic to ensure that the investment programs are aligned to
the risk tolerance of the individual as well as the goal that he sets for. Instead, the investor is able
to reap long-term benefits from such companies as those with good fundamentals, growth
prospects, and efficient risk management tools amid the challenges in the markets. In conclusion,
the critical success factor that will help to harness the various opportunities offered by these ten
trade companies will depend on sound decision making based on analysis.